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DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES | 9 Months Ended
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Sep. 30, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES | DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES We are exposed to market risk related to potential fluctuations in foreign currency exchange rates and interest rates. We use derivative financial instruments to mitigate the financial impact of exposure to these risks. Accounting for derivative financial instruments is governed by ASC Topic 815, Derivatives and Hedging, (“ASC 815”). In accordance with ASC 815, we record our derivative instruments at fair value as either assets or liabilities in the Consolidated Balance Sheets. Changes in the instruments’ fair value are accounted for based on their intended use. Gains and losses on derivatives that are designated and qualify for cash flow hedge accounting are recorded as a component of accumulated other comprehensive income (“AOCI”) and reclassified into earnings when the hedged transaction materializes. Gains and losses on derivatives that are designated and qualify for net investment hedge accounting are recorded as a component of AOCI and will not be reclassified into earnings until the investment is partially or completely liquidated. The changes in the fair value of derivatives not designated as hedging instruments and those which are no longer effective as hedging instruments, are recognized immediately in earnings. FOREIGN CURRENCY EXCHANGE AND OPTION CONTRACTS The New Zealand subsidiary’s export sales are predominately denominated in U.S. dollars, and therefore its cash flows are affected by fluctuations in the exchange rate between the New Zealand dollar and the U.S. dollar. This exposure is partially managed by a natural currency hedge, as ocean freight payments and shareholder distributions are also paid in U.S. dollars. We manage any excess foreign exchange exposure through the use of derivative financial instruments. The New Zealand subsidiary typically hedges 50% to 90% of its estimated foreign currency exposure with respect to the following twelve months forecasted sales and purchases, less distributions, and up to 75% of the forward 12 to 18 months. Additionally, the New Zealand subsidiary will occasionally hedge up to 50% of its estimated foreign currency exposure with respect to the following 18 to 48 months forecasted sales and purchases, less distributions, when the New Zealand dollar is at a cyclical low versus the U.S. dollar. Foreign currency exposure from the New Zealand subsidiary’s trading operations is typically hedged based on the following three months forecasted sales and purchases. As of September 30, 2021, foreign currency exchange contracts had maturity dates through March 2023 and all previously existing foreign currency option contracts have expired. Foreign currency exchange and option contracts hedging foreign currency risk on export sales and ocean freight payments qualify for cash flow hedge accounting. We may de-designate these cash flow hedge relationships in advance or at the occurrence of the forecasted transaction. The portion of gains or losses on the derivative instrument previously accumulated in other comprehensive income for de-designated hedges remains in accumulated other comprehensive income until the forecasted transaction affects earnings. Changes in the value of derivative instruments after de-designation are recorded in earnings. INTEREST RATE PRODUCTS We are exposed to cash flow interest rate risk on our variable-rate debt and on anticipated debt issuances. We use variable-to-fixed interest rate swaps and forward-starting interest rate swap agreements to hedge this exposure. For these derivative instruments, we report the gains/losses from the fluctuations in the fair market value of the hedges in AOCI and reclassify them to earnings as interest expense in the same period in which the hedged interest payments affect earnings. To the extent we de-designate or terminate a cash flow hedging relationship and the associated hedged item continues to exist, any unrealized gain or loss of the cash flow hedge at the time of de-designation remains in AOCI and is amortized using the straight-line method through interest expense over the remaining life of the hedged item. To the extent the associated hedged item is no longer effective, the gain or loss is reclassified out of AOCI to earnings immediately. INTEREST RATE SWAPS During the second quarter of 2021, we terminated and cash settled $250 million in notional value of our interest rate swaps, maturing in 2030, in connection with the repayment of $250 million outstanding under the 2020 Incremental Term Loan. Upon termination of the swap, we received $6.8 million from our counterparty. As of September 30, 2021, there was $16.3 million gain recorded in accumulated other comprehensive loss in connection with the terminated interest rate swap, which will be reclassified to earnings through interest expense over the remaining life of the hedged items, as the originally hedged cash flows remain probable. During the second quarter of 2021, we terminated and cash settled $100 million in notional value of our interest rate swaps, maturing in 2026, in connection with the prepayment of $100 million on the 2026 Incremental Term Loan. Upon termination of the swap, we paid $2.2 million to our counterparty that was recognized immediately into earnings as interest expense, as the forecasted cash flows will no longer occur. See Note 9 — Debt for additional information. The following table contains information on the outstanding interest rate swaps as of September 30, 2021:
Outstanding Interest Rate Swaps (a)
Date Entered Into | Term | Notional Amount | Related Debt Facility | Fixed Rate of Swap | Bank Margin on Debt | Total Effective Interest Rate (b)
August 2015 | 9 years | $170,000 |  | Term Credit Agreement | 2.20 | % | 1.60 | % | 3.80 | %
August 2015 | 9 years | 180,000 |  | Term Credit Agreement | 2.35 | % | 1.60 | % | 3.95 | %
April 2016 | 10 years | 100,000 |  | Incremental Term Loan | 1.60 | % | 1.65 | % | 3.25 | %
April 2016 | 10 years | 100,000 |  | Incremental Term Loan | 1.60 | % | 1.65 | % | 3.25 | %
(a) All interest rate swaps have been designated as interest rate cash flow hedges and qualify for hedge accounting. (b) Rate is before estimated patronage payments. TREASURY LOCKS During the first quarter of 2020, we entered into three treasury lock agreements, which were designated and qualified as cash flow hedges. Prior to expiration, we de-designated and settled the treasury locks by converting them into interest rate swap lock agreements (discussed below). As of September 30, 2021, there was $17.8 million loss recorded in accumulated other comprehensive loss in connection with the settled treasury locks, which will be reclassified to earnings as interest expense over the life of the hedged item. For additional information regarding the expired treasury lock agreements, see Note 16 - Derivative Instruments and Hedging Activities in our 2020 Form 10-K. INTEREST RATE SWAP LOCKS Upon de-designation, we converted the above treasury lock agreements to interest rate swap lock agreements, which were designated and qualified as cash flow hedges. During the second quarter of 2020, we de-designated and partially cash settled $11.1 million of the interest rate swap locks and converted them into an interest rate swap agreement. As of September 30, 2021, there was $1.2 million loss recorded in accumulated other comprehensive loss in connection with settled interest rate swap locks, which will be reclassified to earnings as interest expense over the life of the hedged item. For additional information regarding the expired interest rate swap lock agreements, see Note 16 - Derivative Instruments and Hedging Activities in our 2020 Form 10-K. FORWARD-STARTING INTEREST RATE SWAPS During the second quarter of 2021, we de-designated and settled $325 million in notional value of our forward-starting interest rate swap, maturing in 2032, by converting it into a new forward-starting interest rate swap agreement. As of September 30, 2021, there was $9.9 million gain recorded in accumulated other comprehensive loss in connection with the converted forward-starting interest rate swap, which will be reclassified to earnings through interest expense over the remaining life of the hedged item. The following table contains information on the outstanding forward-starting interest rate swaps as of September 30, 2021:
Outstanding Forward-Starting Interest Rate Swaps (a)
Date Entered Into | Term | Notional Amount | Fixed Rate of Swap | Related Debt Facility | Forward Date | Maximum Period Ending for Forecasted Issuance Date
March 2020 | 4 years | $100,000 |  | 0.88 | % | Term Credit Agreement | August 2024 | N/A
May 2020 | 4 years | 50,000 |  | 0.74 | % | Term Credit Agreement | August 2024 | N/A
May 2021 (b) | 7 years | 200,000 |  | 0.77 | % | Future Issuance | Feb. 2022 | N/A
(a) All forward-starting interest rate swaps have been designated as interest rate cash flow hedges and qualify for hedge accounting. (b) The forward-starting interest rate swap entered into in May 2021 contained an embedded mark-to-market gain, which we recovered through a reduced charge in the fixed rate over what would have been charged for an at-market swap. CARBON OPTIONS The New Zealand subsidiary enters into carbon options from time to time to sell carbon assets. Changes in fair value of the carbon option contracts are recorded in “Interest and other miscellaneous income (expense), net” as the contracts do not qualify for hedge accounting treatment. As of September 30, 2021, all previously existing carbon option contracts have expired. The following tables demonstrate the impact, gross of tax, of our derivatives on the Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2021 and 2020:
|  |  | Three Months Ended September 30,
| Income Statement Location |  | 2021 |  | 2020
Derivatives designated as cash flow hedges: |  |  |  |  |
Foreign currency exchange contracts | Other comprehensive (loss) income |  | ($2,618) |  |  | $1,946 |
Foreign currency option contracts | Other comprehensive (loss) income |  | (356) |  |  | 358 |
Interest rate products | Other comprehensive (loss) income |  | 1,288 |  |  | 2,417 |
| Interest expense |  | 2,564 |  |  | 3,783 |
|  |  | Nine Months Ended September 30,
| Income Statement Location |  | 2021 |  | 2020
Derivatives designated as cash flow hedges: |  |  |  |  |
Foreign currency exchange contracts | Other comprehensive (loss) income |  | ($6,366) |  |  | $1,806 |
Foreign currency option contracts | Other comprehensive (loss) income |  | (1,514) |  |  | 85 |
Interest rate products | Other comprehensive (loss) income |  | 46,433 |  |  | (91,203) |
| Interest expense |  | 11,935 |  |  | 6,951 |
Derivatives not designated as hedging instruments: |  |  |  |
Carbon option contracts | Interest and other miscellaneous income (expense), net |  | — |  |  | 563 |
During the next 12 months, the amount of the September 30, 2021 AOCI balance, net of tax, expected to be reclassified into earnings is a loss of approximately $11.7 million. The following table contains details of the expected reclassified amounts into earnings:
| Amount expected to be reclassified into earnings in next 12 months
Derivatives designated as cash flow hedges: |
Foreign currency exchange contracts | $139 |
Interest rate products | (11,842) |
Total estimated loss on derivatives contracts | ($11,703) |
The following table contains the notional amounts of the derivative financial instruments recorded in the Consolidated Balance Sheets:
| Notional Amount |
| September 30, 2021 |  | December 31, 2020 |
Derivatives designated as cash flow hedges: |  |  |  |
Foreign currency exchange contracts | $144,000 |  |  | $49,000 |  |
Foreign currency option contracts | — |  |  | 28,000 |  |
Interest rate swaps | 550,000 |  |  | 900,000 |  |
Forward-starting interest rate swaps | 350,000 |  |  | 475,000 |  |
The following table contains the fair values of the derivative financial instruments recorded in the Consolidated Balance Sheets:
| Location on Balance Sheet |  | Fair Value Assets / (Liabilities) (a)
|  |  | September 30, 2021 |  | December 31, 2020
Derivatives designated as cash flow hedges: |  |  |  |
Foreign currency exchange contracts | Other current assets |  | $1,892 |  |  | $4,968 |
| Other assets |  | 7 |  |  | 1,050 |
| Other current liabilities |  | (1,699) |  |  | — |
| Other non-current liabilities |  | (549) |  |  | — |
Foreign currency option contracts | Other current assets |  | — |  |  | 1,526 |
| Other current liabilities |  | — |  |  | (11) |
Interest rate swaps | Other non-current liabilities |  | (24,178) |  |  | (51,580) |
Forward-starting interest rate swaps | Other assets |  | 11,206 |  |  | 513 |
| Other non-current liabilities |  | — |  |  | (13,042) |
Total derivative contracts: |  |  |  |  |
Other current assets |  |  | $1,892 |  |  | $6,494 |
Other assets |  |  | 11,213 |  |  | 1,563 |
Total derivative assets |  |  | $13,105 |  |  | $8,057 |
Other current liabilities |  |  | (1,699) |  |  | (11) |
Other non-current liabilities |  |  | (24,727) |  |  | (64,622) |
Total derivative liabilities |  |  | ($26,426) |  |  | ($64,633) |
(a) See Note 11 — Fair Value Measurements for further information on the fair value of our derivatives including their classification within the fair value hierarchy. OFFSETTING DERIVATIVES Derivative financial instruments are presented at their gross fair values in the Consolidated Balance Sheets. Our derivative financial instruments are not subject to master netting arrangements, which would allow the right of offset.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI http://asc.fasb.org/extlink&oid=123477628&loc=d3e90205-114008 + Details
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